Ask an Expert: How many rentals is too many?

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Q. Should co-ops and condos limit the number of rentals to a
certain percentage? Is there some “magic” number? I’ve heard 20-30% to balance
encouraging investment while also maintaining quality.

A. Perhaps more important than encouraging investment is ensuring that banks will continue to finance mortgages in your building, observe some of BrickUnderground's experts.

In the current tight lending
environment, banks prefer that fewer than 20 to 30 percent of the apartments
are being rented out, says mortgage broker Kira Silverman. Moreover, she says, banks shy away from making loans in buildings where a single investor owns more
than 10% of the units.

Variables include the number of
units in the building, the type of building—new, old, condo or co-op—and the
mix of tenancies, says real estate lawyer Dean M. Roberts, noting that some
tenants might be leftover rent-regulated tenants in sponsor units.

“If the building is well run and has
solid finances," says Roberts, "the rental number is usually not much of an issue. However, if
there is a large mortgage or financial issues, then the rental units have much
more of an effect.”

There are some other reasons to be
conservative when it comes to the percentage of rentals.

A lot of rentals can “make a buyer
wary that the whole building will be more like a rental, and the implication
for many is that the building will be less cared for,” says real estate broker
Deanna Kory.

Even though many boards are at least
temporarily relaxing their sublet policies in a challenging sales environment,
they “believe that subtenants often do not have the same community interest at
heart as most owners,” says real estate lawyer Eric Goidel.

Another wrinkle, says Roberts, is
that many buildings have difficulty reaching a quorum for annual meetings,
especially when there a large number of renters.

Co-ops may need to be more
conservative than condos about the number of rentals they allow.

Most underlying co-op mortgages "have a requirement for the
maximum numbers of investor units, so co-ops should check with their underlying
mortgage holders so they are not in violation of their mortgage," says Silverman

“The nature of a co-op is that you
buy it, live in it, and sell it….Condos on the other hand are designed to
sublet,” she says. But even in a condo, she says, “there
should be a minimum amount of months—most buildings say that you must rent for
at least a year. That way you do
not turn the building into a B&B.”

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